BERLIN — As economic cycles shift, so do hotel investment patterns and relationships among key stakeholders.

Patterns of recovery from the COVID-19 pandemic vary across the countries of Europe, but hotel investors, brand and third-party management company executives say they are eager to take advantage of recovery where they can, while still protecting their investments.

On a panel of hotel investment stakeholders at the International Hotel Investment Forum, David Kellett, managing director of institutional investor Invesco Real Estate, spoke about the company’s 2021 partnership with Westmont Hospitality to co-invest in a portfolio of IHG Hotels & Resorts-branded hotels across Europe, with Westmont acting as tenant and co-investor.

The deal underscored what Kellett said is key in the current investing environment — alignment.

“We restructured that portfolio and there’s a very strong alignment of interest in the parties,” he said.

Overall, he said that in recent years, “the landlord/tenant relationship has changed as you’ve discovered who you can work through a crisis with and who you can’t.”

Along with good relationship alignment, Kellett said now is the time for investors to be open to all options.

“In a recovery, you want to be as exposed to as much of the recovery as you can be,” he said. “All structuring options come in. You’re dealing with a big recovery now, so structure the lease in a way you can capture what is really important. If you have third-party operators, build in flexibility.”

Third-party management is one option European investors are showing increasing interest in as the region recovers, said David Anderson, executive vice president, international at Interstate Hotels UK Ltd. Interstate is part of U.S.-based third-party management giant Aimbridge Hospitality.

“We’ve had a huge drive in solicitations,” Anderson said. “We’re seeing new private equity funds setting up, targeting portfolios, and they’re coming to organizations like Interstate because they know we work well with brands, we underwrite all our projects and we have central services.”

Patrick Fitzgibbon, senior vice president of development for the Europe, Middle East and Africa region at Hilton, said that in general, hotel investors continue to get more comfortable with franchising brands in the region. He called franchising “the most significant aspect of our growth" over the past 10 years in the EMEA region.

The company recently announced a deal for six additional brands in the Hilton Garden Inn and Hampton by Hilton brands to open in Europe.

Interest in franchising typically grows following years of difficult operating environments, as hotel owners weigh their options for growing business.

This year is no exception, Fitzgibbon said.

“We’re operating 11 of our 18 brands in EMEA and seeing growth in every segment,” he said. “Particularly at the moment we’re seeing a lot of conversion activity from independent hotels that need a little more to attract customers.”

While the pandemic did cause some hotels to weigh options, speakers agreed that waves of distressed assets have not yet hit European markets — and may not.

Robert Mangan, director of Bain Capital, said his firm is focused on acquiring hotel assets that are “under-managed and under-invested.”

While distressed assets are more visible in Spain and Italy, he said overall, the wave of deals hasn’t hit quite yet.

Most recently Bain Capital partnered with Stoneweg Hospitality to acquire the 168-room Palladium Hotel Don Carlos in Ibiza, which it will renovate and reposition.

“It’s hard to make a sweeping statement about distress,” Mangan said. “It’ll be region-specific and based on what that lender has on their book and in the market. I don’t think we’re quite there; cost inflation has caught a lot of people off-guard.”

Kellett’s take is that as government subsidies wear off, more deals will hit the market but that “it’ll be more pure stress than distress,” he said. “It’s not as volatile as it was after the Great Recession.”

While there’s no doubt leisure-driven resorts continued to be in demand from travelers around the world, that category of hotels hasn’t traditionally been the most favored among investors.

But that’s changing, speakers said.

“Leisure resorts are typically more suited to the private equity model,” Kellett said. “Leisure led the recovery the last two times, but for institutional capital to go into the resort market” is tougher.

“We’ve invested in cities with strong leisure and strong business demand,” he said. “Would we look at resorts? Yes, but we’d draw a pretty high bar because you have to get a great location, sustainability, a lease structure with a tenant you can rely on. It’s not as easy but it’s something on the list, not off the list.”

Mangan said Bain Capital “likes leisure” but is cautious on what he called “lower-end leisure,” like fixed-price holiday packages, which rely heavily on airlift.

That idea of airlift uncertainty and shorter leisure seasons can be a turnoff to all hotel stakeholders, but those tides may be turning.

“Changes in domestic-led leisure have had a positive impact — Greece, Spain and Italy have been growing for the last five years and now it’s accelerated,” Fitzgibbon said. “The challenge is to persuade the airlines to extend the season.”

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